Tesla (TSLA) Will Be the Largest S&P 500 Addition in History, But Most of the Upside is Priced In and Shares Could Trade Lower Post Inclusion - Morgan Stanley

December 7, 2020 8:18 AM EST
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Morgan Stanley quant analyst Boris Lerner discussed the upcoming addition of Tesla (NASDAQ: TSLA) to the S&P 500 on December 18th. Lerner notes it will be the largest addition to the S&P 500 in history, with an estimated $78B of inflows from passive funds indexed to the S&P 500, or about 17% of Tesla free float. Tesla is projected to become the 8th largest stock in the index, with a weight of 1.46%.

Lerner notes that shares of Tesla have rallied 46.8% since the announcement. They expect the stock to remain well bid into the rebalance, although they think most of the price appreciation is behind us.

"Analysis of prior large additions to the S&P 500 index shows that in recent years, most of the rebalance related outperformance took place in the few days immediately post announcement, with the stocks slightly beating the index on the rebalance date itself," the analyst commented.

The analyst further noted that large additions to the S&P 500 also tend to underperform on the day immediately following the announcement. Given the large rally in TSLA stock so far, they said they would not be surprised to see it trading lower after the inclusion.

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